What Is Payroll Accounting -- And Why You Need to Know

Payroll accounting is about recording your payroll expenses in your accounting system. These recordings are called "payroll journal entries," which can be made in your payroll journal and then posted to your general ledger. Or they can be recorded directly in your general ledger.

To understand the importance of payroll accounting, it's necessary to examine your legislative and financial obligations.

Legislatively, federal and state wage-and-hour laws require that you pay your employees accurately and on time. Moreover, you must report wages paid, taxes withheld and your own share of taxes to the federal and state taxation agencies. Financially, you must ensure that you're compensating your employees and managing your payroll expenses appropriately.

Payroll accounting helps you achieve those legislative and financial objectives, while providing you with an audit trail for your payroll transactions.

Now that you understand the significance of payroll accounting, let's take a quick look at what the process entails.

Payroll taxes withheld from employees' paychecks, including federal and state income taxes, Social Security tax, and Medicare tax.

Other paycheck deductions, such as health insurance premiums, 401(k) contributions and wage garnishments.

Employer's portion of fringe benefits, such as health insurance, paid time off and matching 401(k) contributions.

Payroll journal entries are made as expenses (meaning, they have already been paid) or liabilities (meaning, they are owed but have not yet been paid).

Since your expenses are paid amounts, they should be posted as debits. For example, salaries and wages that have already been paid are expenses and should be recorded as debits.

Since liabilities are amounts that are owed but not yet paid, they should be posted as credits. For example, withholdings from employees' paychecks and your portion of payroll taxes that are both waiting to be paid are liabilities and should be recorded as credits.

Later, when you pay your employees' withheld taxes, your portion of payroll taxes and any other payroll amounts owed, you will need to make another journal entry. This involves reducing the (credit) balance in your cash account by posting your paid liabilities as debits. By making these payments, you decrease your liabilities. But, you also lost cash because you made those payments.

This is only a brief introduction to payroll accounting. There are many other aspects of this accounting discipline that we haven't addressed, including reconciliation, which allows you to verify the accuracy of your payroll expenses and liabilities.

Be sure to let us know if you have any questions about your payroll system; doing so will enable us to make sure you're on the right track.

Our firm provides the information in this e-newsletter for general guidance only,
and does not constitute the provision of legal advice, tax advice, accounting services,
investment advice, or professional consulting of any kind. The information provided herein should not be
used as a substitute for consultation with professional tax, accounting, legal, or other competent
advisers. Before making any decision or taking any action, you should consult a professional adviser who
has been provided with all pertinent facts relevant to your particular situation. The information is provided
"as is," with no assurance or guarantee of completeness, accuracy, or timeliness of the information,
and without warranty of any kind, express or implied, including but not limited to warranties of
performance, merchantability, and fitness for a particular purpose.